A Cost-Benefit Analysis

The White House's Office of Management and Budget issued this week a draft report on the costs and benefits of the federal regulatory behemoth.

The report's estimate of "social regulations" producing up to $2 trillion in benefits annually is "fuzzy math" run amok.

Though social regulations involve a broad range of issues — such as the environment, transportation, labor, and food — an astounding $1.78 trillion of the estimated maximum annual benefits supposedly are produced by environmental regulations alone.

Do Environmental Protection Agency regulations really produce benefits to the public worth on the order of 18 percent of our $10 trillion gross domestic product?

The basis for the bulk of claimed environmental benefits arises from a 1997 EPA report estimating that air pollution regulations produced as much as $50 trillion in benefits between 1970 and 1990 — roughly $200,000 per person over those 20 years.

You won't find your share of the air pollution dividend in your bank account. The supposed benefits are far less tangible, amounting to your share of the hypothetical economic value of lives saved and health care costs avoided allegedly due to air pollution regulations.

How did the EPA calculate the ethereal $50 trillion? Most of the benefits arise from the agency's claim that air pollution regulations save tens of thousands of lives per year. Each life "saved" is worth $5 million. Multiplying tens of thousands by millions over decades gets into trillions pretty quickly.

Do EPA air pollution regulations really save lives?

Former OMB regulatory analysts Randall Lutter and Richard Belzer pointed out in their article "EPA Pats Itself on the Back" (Regulation,Fall 2000): "More than 90 percent of the benefits estimated by EPA arise from the reduction of risks from particulate matter (PM). Those risks are highly uncertain … Apart from a handful of statistical associations, scientists generally have no direct evidence about the risks of low-level exposures to PM."

Even assuming for the sake of argument that reductions in PM have health impacts, the EPA grossly overestimates the value of these benefits.

Lutter and Belzer point out that premature death from PM is statistically associated only with elderly people, especially those with pre-existing health conditions. Are marginal extensions in life expectancy among such seniors really worth $5 million per person?

The EPA's valuation process is overly generous for good reason. If the EPA didn't exaggerate the benefits of its rules, the agency and its friends in Congress would have a difficult time justifying the high costs imposed on the public, such as the estimated $100 billion per year from the last round of air pollution standards in 1997.

OMB, the traditional watchdog for regulatory agencies, acknowledges the regulatory benefits presented in its report are "highly uncertain" and says federal agencies should adopt a "science-based" approach to regulation.

This seems to be merely lip service.

If OMB was really serious about applying science-based cost-benefit analysis to federal rulemaking, it missed a golden chance to demonstrate its commitment to that laudable goal.

Instead of simply parroting in the report the EPA's claims of benefits from air pollution regulations, the OMB should have conducted its own cost-benefit assessment of the EPA's rules. After all, the EPA's dubious claims constitute the vast majority of the alleged benefits of federal social regulation.

But picking on federal regulation — particularly the EPA's — is politically risky for President Bush, whose public approval ratings soared largely on the president's role in the war against terrorism.

Democrats think their best chance to defeat Bush in 2004 rests with domestic issues. Bush's chief political adviser Karl Rove is unlikely to allow OMB to make too much of a stink about regulatory issues for fear of political firestorms like last year's involving the EPA regulations on arsenic in drinking water.

OMB will do its best to avoid public fights with the EPA, a rogue agency that can create embarrassing public controversy for the president overnight through its extensive network of environmental activists and sympathetic media.

Science-based regulation at the EPA? Yeah, right. I'm not holding my breath for that or my share of this year's social regulations dividend.

Steven Milloy is the publisher of JunkScience.com , an adjunct scholar at the Cato Institute and the author of Junk Science Judo: Self-defense Against Health Scares and Scams (Cato Institute, 2001).